A Labor Market Mired in Historical Lows is an Unhealthy Labor Market

Today the Bureau of Labor Statistics announced that the headline unemployment rate was “essentially unchanged” at 7.6 percent. Since January, the unemployment rate has remained between 7.9 percent and 7.5 percent. While the May unemployment figures appear to indicate that the employment situation has stabilized, the reality is far less rosy. The number of persons not in the labor force remains has historic levels, and is up nearly two million from May of 2012.

As shown in the graph below, the decline in the unemployment rate (right axis) over the last 3 years closely aligns with the decline in the labor force participation rate (left axis), which has been falling since the recession began in 2008. Remember, a person is not counted as unemployed unless they are actively searching for a job (i.e. part of the labor force). And for May participation in the labor force was also “essentially unchanged” at 63.4 perecent. The evidence continues to show that the relatively “positive looking” unemployment rate has more to do with people leaving the labor force than an improving labor market.

The Obama administration will no doubt try to spin the May unemployment rate proof the economy is on the right track and not getting worse, but this is wishful thinking. With the population increasing every day, and the number of people looking for work falling, the headline unemployment figure is increasingly an unreliable measure of employment.

Looking at the employment-population ratio, we see continued evidence that the labor market is reaching a new normal. This ratio has remained roughly between 58 percent and 59 percent since March of 2009, and for May of this year came in at 58.6 percent–exactly where it was in May 2012. It is possible that the U.S. could be experiencing a new normal unemployment rate of 7.5 percent to 8 percent, which is similar to that of many European countries, rather than the pre-recession normal rate of approximately 5 percent. This is bad news for America.

Anthony Randazzo

Anthony Randazzo is director of economic research for Reason Foundation, a nonprofit think tank advancing free minds and free markets. His research portfolio is regularly evolving, and he maintains a wide interest in economic policy at both a domestic and international level.

Adam Millsap is a summer research intern for Reason Foundation. He is a PhD candidate in Economics at Clemson University.